In an economy the consumption function is C = 500 + 0.8Y where C is consumption expenditure and Y is income. Calculate the equilibrium level of income and consumption expenditure when investment expd. is 500.
(i) Given C = 500 + 0.8y
I = 500
We know, Y = C + I
Y = 500 + 0.8y + 500
Y – 0.08y = 1000
y = 1000/0.2 = 5000
(ii) C = Y – I
= 5000 – 500
= Rs. 4500 Crores
